Cut Inflation Act 2022 includes new corporate tax provisions | Pillsbury Winthrop Shaw Pittman LLP
Corporate minimum tax
The corporate minimum tax is designed to ensure that certain large corporations will be subject to a minimum tax of 15% on their adjusted financial statement income, or accounting income.
This tax will be imposed on corporations whose “adjusted financial statement income” over a consecutive three-year period exceeds $1 billion. In most cases, “adjusted financial statement income” will be the income reported on audited financial statements used for SEC reporting or other non-tax purposes. If a corporation has not been in existence for three years or has a short tax year, the Act provides special rules to remedy this.
Special rules apply for the purpose of determining adjusted income in the financial statements of certain related corporations. Under an aggregation rule, the income of all members of a controlled group is considered to determine whether a corporation is an applicable corporation. In addition, the income of corporations filing in a consolidated group in the United States is generally aggregated, and corporations under common control (based on a 50% or greater ownership interest) of a joint venture parent may be aggregated if the partnership is engaged in commercial activity. The law, as passed, does not include provisions proposed in earlier versions of the corporate minimum tax that would have extended these aggregation rules to require certain private equity funds to aggregate the accounting income of their holding companies. Income from a company’s adjusted financial statements also includes the company’s income from its disregarded entities, its distributive share of the income of the partnership, and its prorated share of the income of its controlled foreign subsidiaries (CFCs) at l in respect of which the company is a US shareholder.
If a national company is part of a multinational group, there are different rules to determine whether the national company will be considered an applicable company. Generally, the first step is to determine whether the total income of the entire group whose parents are foreigners exceeds $1 billion. If so, the second step is to determine whether the domestic corporation’s income, including its appropriate share of its CFC income, is equal to or greater than $100 million. In addition, if a foreign corporation is actively engaged in a trade or business in the United States, that trade or business is treated as a separate U.S. subsidiary and, if it meets the two criteria discussed in this paragraph, could be subject to to the minimum corporate tax.
Generally, once a corporation meets the annual income test, the corporation’s status as an applicable corporation becomes permanent even if the corporation’s adjusted financial statement income falls below the threshold in future years. A change in status only appears to be available if the Treasury determines that continued treatment as an “applicable corporation” is not appropriate, which appears to be limited to situations where there is a change in control of the corporation or Adjusted financial statement income for the company is less than $1 billion for several consecutive years.
The result of the adjusted financial statements allows for adjustments for accelerated tax depreciation and tax depreciation of certain qualifying wireless spectrum. A major difference between book income and tax income is depreciation, which could therefore be of significant benefit to taxpayers. In addition, Adjusted Financial Statement Income may be reduced by loss carryforwards from Financial Statements from other tax years, but is subject to a limit equal to 80% of Financial Statement Income (before this deduction), and these carryovers are limited to losses for tax years ending after December 31, 2019.
The corporate minimum tax liability is the positive difference between the calculated corporate minimum tax (reduced by certain foreign tax credits and general business credits) and the sum of the normal income tax of the company plus its subjection to base erosion and anti-abuse tax. (TO BEAT). Corporate minimum tax payments can be used as a credit in future years to the extent that the company’s regular corporate tax and its BEAT exceed the company’s calculated corporate minimum tax.
This provision would come into force on December 31, 2022.
The Organization for Economic Co-operation and Development (OECD) is considering introducing “Pillar 2”, which would impose a minimum tax of 15% on the financial accounts of multinational groups whose annual turnover exceeds 750 million euros. euros. Although the two regimes appear similar, there are significant differences, including jurisdiction-by-jurisdiction second pillar taxation, which may result in a company subject to corporate minimum tax being subject to additional tax in under the second pillar.
There was a version of the corporate minimum tax in the Tax Reform Act of 1986. The 1986 provision began with taxable income and required corporations to make certain accounting adjustments, such as disallowing accelerated depreciation as an adjustment. However, over time, Congress significantly reduced the impact of the provision until it was finally repealed in 2017.
Excise tax on share redemptions
The Act imposes a 1% corporate excise tax on the fair market value of shares of a “target corporation” that are redeemed during the tax year. In the law, a target company is defined as “any national company whose shares are traded on an established stock exchange”. A redemption for the purposes of this provision is defined as a redemption within the meaning of Section 317(b) of the Internal Revenue Code of 1986, as amended (the Code) and anything that the IRS deems to be “economically similar to a redemption. Section 317(b) of the Code defines a repurchase as occurring when “the company acquires its shares from a shareholder in exchange for property, whether or not the shares so acquired are cancelled, withdrawn or held as treasury shares “. This could produce interesting results if a transaction is treated as a redemption for tax purposes when it is not a redemption under corporate law. The law gives the IRS the ability to issue guidance on this provision, and taxpayers would benefit from clarifying guidance in this area.
The tax calculation is the fair market value of the total shares redeemed during the year minus the sum of the fair market value of the shares issued during the year and the fair market value of the shares issued to employees as compensation during the year. The timing of the valuation of the fair market value of shares issued or redeemed is not specified, but is presumably based on the fair market value of the shares on the effective date of the relevant transaction. If so, the excise tax could apply to a corporation even though there was no net reduction in the number of outstanding shares of the corporation during the year. Excise tax is payable by the company redeeming the shares and is not deductible for US federal income tax purposes.
In addition, buyouts by “specified affiliates” will be treated as a target buyout. These affiliates are generally corporations or partnerships that are more than 50% owned directly or indirectly by the target company. There are special rules that apply similar rules to publicly traded foreign companies where the shares of the foreign company are repurchased by certain domestic subsidiaries or in certain situations where the foreign company is treated as an “expatriate entity” under the tax regime. American inversion.
There are several exceptions to excise tax, including: (1) to the extent that the share repurchase relates to a tax-free reorganization in which no gain or loss is recognized on the repurchase by the shareholder; (2) the repurchased shares (or an amount of shares equal to the repurchased amount) are paid into an employer-sponsored retirement plan, employee stock ownership plan or similar plan; (3) where the total amount redeemed during the taxation year does not exceed $1 million; (4) under regulations prescribed by the Secretary, where the redemption is made by a company whose ordinary course of business includes trading in securities; (5) buyouts by a regulated investment company or REIT; and (6) to the extent that the redemption is treated as a dividend for federal income tax purposes.
This provision would come into force on December 31, 2022.
Increase in Internal Revenue Service funding
The IRS will receive $80 billion in funding to spend over the next ten years in addition to its annual appropriations. More than $45 billion is allocated to law enforcement efforts, with the rest of the funds to be used for other functions, including operations support (over $25 billion), modernization of security systems business (nearly $5 billion), taxpayer service (over $3 billion), and a task force to design a direct electronic file system run by the IRS. The Act is silent on how the extra money will be spent on law enforcement; however, in order to combat fears that the middle class will be the target of increased audits, Treasury Secretary Janet Yellen has sent a letter to IRS Commissioner Chuck Rettig that foresees that the agency should not use the additional resources to increase audits on small businesses or households earning less than $400,000 per year. One of the goals of the additional funding is to help close the tax gap by generating an additional $124 billion in revenue (net of expenses) currently lost due to fraudulent tax filings. Importantly, this brings IRS funding to previous levels before years of cuts by Congress. As professionals who work regularly with the IRS, we have been appalled by recent allegations highlighted in the press that this much-needed funding will be used to weaponize the IRS. We are concerned that such unsubstantiated claims will undermine our system of voluntary compliance and compromise the security of many hardworking IRS employees.
The law extends the excess business loss limitation of unincorporated taxpayers. This provision was due to expire in 2027 and has been extended to 2029. Although included in earlier versions of the legislation, the proposed rules changing the treatment of “carried interest” were not included in the Act. The Act also has several climate change initiative credits which are discussed in detail here.